Business context and reporting period
WESCO International, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. It distributes electrical, industrial and communications products and provides supply-chain and logistics services, primarily in North America. The company served more than 75,000 active customers through about 475 branches. The 2013 results include the acquired EECOL business for the full year; EECOL was acquired in December 2012.
Financial performance and liquidity
- Revenue: $7.513 billion, up 14.2% from $6.579 billion. Acquisitions contributed 14.6 percentage points; organic sales were flat, while foreign exchange reduced growth by 0.4 points.
- Profit and margins: Operating income was $481.0 million, up from $332.9 million; operating margin was 6.4%, versus 5.1%. Net income attributable to WESCO was $276.4 million, up 37.0%; diluted EPS was $5.25, versus $3.95. Net margin was 3.7%, versus 3.1%.
- Gross margin: Cost of goods sold was 79.4% of sales, compared with 79.8% in 2012, reflecting acquisition mix and margin contributions.
- Fourth quarter: Sales were $1.880 billion, versus $1.644 billion a year earlier; operating income was $110.6 million, versus $50.4 million; net income attributable to WESCO was $58.0 million, versus $26.5 million. Quarterly results include timing and unusual-item effects described below.
- Cash flow: Operating cash flow was $315.1 million, up from $288.2 million. Capital expenditures were $27.8 million; company-reported free cash flow was $308.4 million, including a $21.1 million add-back for a pension contribution funded through the EECOL purchase-price adjustment.
- Debt and leverage: Balance-sheet debt was $1.488 billion, including $174.7 million of unamortized debt discount; principal debt including that discount was $1.662 billion, down from $1.919 billion. Adjusted EBITDA was $512.5 million. The company-reported leverage ratio was 3.2x gross and 3.0x net of cash, compared with 4.7x and 4.5x, respectively.
- Liquidity: Reported liquidity was $605.6 million: $512.2 million of available revolving-credit capacity and $93.4 million of invested cash under the company’s liquidity measure. Balance-sheet cash and cash equivalents were $123.7 million. WESCO said it complied with debt covenants at year-end.
Material changes, outlook and risks
- WESCO issued $500 million of 5.375% senior notes due 2021 and used the proceeds, with excess cash, to repay $500 million of U.S. term loans. The refinancing generated a $13.2 million noncash debt-extinguishment loss. Interest expense rose to $85.6 million from $47.8 million.
- 2013 SG&A included a favorable $36.1 million insurance recovery for the ArcelorMittal litigation charge recorded in 2012. The company also recognized covered litigation interest liabilities and corresponding receivables; the judgment is under appeal. A $2.3 million loss was recorded on the sale of the Argentina business.
- Management expected 2014 capital expenditures to be similar to 2013 levels and planned to direct excess cash primarily toward debt reduction and acquisitions. It stated a goal of above-industry organic growth and accretive acquisitions, but provided no specific revenue or earnings guidance.
- Key risks include economic weakness and customer project delays, supplier concentration and short-notice termination of supplier arrangements, commodity-price and product-availability changes, acquisition integration and international operating risks, foreign exchange, cyber or operational disruption, competition, and debt-service and covenant constraints. Goodwill and indefinite-lived intangible assets totaled approximately $1.84 billion; no impairment was identified in 2013.
- Other items to monitor include $31.5 million of acquired EECOL cash expected to be returned to sellers and fully accrued at year-end; $97.9 million of cash held by foreign subsidiaries, some potentially subject to U.S. tax if repatriated; and $525.6 million of foreign earnings considered permanently reinvested.
Important facts for investors to verify
- How much future growth is organic, given that acquisition contributions exceeded reported sales growth in 2013.
- Whether acquired businesses sustain margins and deliver expected integration benefits, especially as amortization expense increased materially.
- The resolution and insurance recovery of the ArcelorMittal appeal and any effect on earnings or cash flows.
- Debt refinancing, repayment requirements and liquidity available at the 2016 maturities of the revolving and receivables facilities; confirm the distinction between carrying debt and principal debt.
- The sustainability of operating cash flow and working-capital performance, and whether impairment indicators emerge for goodwill or trademarks.